Football is a global market and star players relocate constantly, quite often from country to country. Usually, football players sign contracts with clubs for a fixed term and if they transfer before their contract expires, the new club pays compensation to the old club as per the terms of the buyout clause contained in the player’s contract. Normally, there is a lot of planning and preparation when bidding on a player whose contract contains buyout clauses, otherwise there is a threat of a huge tax bill on top of the deal!
Buyout clauses are a form of penalty clause. They are permissible by FIFA regulations on the Status and Transfer of Players. The Commentary on the FIFA regulations explains that: “The parties may, however, stipulate in the contract the amount that the player shall pay to the club as compensation in order to unilaterally terminate the contract (a so called buyout clause). The advantage of this clause is that the parties mutually agree on the amount at the very beginning and fix this in the contract. By paying this amount to the club, the player is entitled to unilaterally terminate the employment contract. With this buyout clause, the parties agree to give the player the opportunity to cancel the contract at any moment and without a valid reason, i.e. also during the protected period, and as such, no sporting sanctions may be imposed on the player as a result of the premature termination.”
The transfer of a player involves three parties; the buying club, the selling club and the player. The two clubs must first agree on the transfer fee and then the buying club can negotiate the terms of the player’s contract such as salary, bonuses, etc. In essence, a buyout clause is the valuation that a club has of a player.
Each league and country involved in the FIFA regulated football transfer window, applies different rules and tax laws regarding the taxability of buyout clauses. Buyout clauses, transfer fees and tax laws complicate the international football market. Tax on the transfer fee, is the responsibility of the selling club usually. Whether or not that tax payment is included within the amount indicated by the transfer fee, is not known because it is not customary to publicly disclose the details of such agreements.
The tax residency of the player is critical when determining the taxability of buyout clauses. If the player is a tax resident of the country where the buying club is located, then the payment may be construed as a benefit in kind and thus taxed as employment income. Caution should be exercised so as to prevent the player from spending 183+ days in the buying club’s country and thus becoming a tax resident of that country during the year of payment of the buyout money.
The Double Tax Treaties in place between countries normally ensure avoidance of double taxation. However, the player may plan his days spent between the buying and selling clubs’ countries to make sure that he pays the lesser possible taxation. Special attention should be given to Article 17 of the OECD which designates that only income paid in consideration for personal activities of sportspersons exercised in the source state, falls within its gist according to the “principle of personal performance” and assigns the full taxing right to the country of performance whereas the sports person must be a resident of the other contracting state.
Buyout clauses are not so common in the UK, due to the UK legal system where English courts are likely to hold such clauses as null and void. On the other hand, in Spain it is mandatory to include a buyout clause in the contract of every player, so as to enable them to pay off their contract if they decide to leave the team. In Spain, the buyout money is deposited with La Liga which then passes the money onto the selling club which in turn, releases the player from the contract. Normally, the buying club pays the player the buyout sum upfront so that he can proceed and make the payment to the selling club. Up until October 2016, the money advanced by the buying club to the player was considered personal income and was thus subject to tax with a maximum rate of approximately 50% on the buyout fee. Currently, as per Spanish legislation the player receives the payment of the funds stipulated by the buyout clause from the buying club and recognizes a capital gain for that amount. When he pays the buyout funds to the selling club, it is considered a capital loss for the player which he can set off with capital gains. Therefore, given that both the capital gain and capital loss amounts are equal, the player does not incur any tax liability in Spain.
It is obvious that buyout transactions require systematic planning in view of their potential tax implications. From a tax point of view it is not crystal clear whether a tax liability will arise in the selling or buying club’s country or in both. The tax advisors of the parties involved will need to look into tax residency and double tax treaty provisions of the countries involved in order to ensure tax optimization of the entire buyout transaction. For more information on the tax planning involved in football contract buyout transactions, you may contact us at [email protected].
